4.1 Policy Provisions in Practice: Duties After Loss, Proof of Loss, Mortgagee Rights, Appraisal, Arbitration & Cancellation

4.1 Policy Provisions in Practice: Duties After Loss, Proof of Loss, Mortgagee Rights, Appraisal, Arbitration & Cancellation

Outline section III — Policy Provisions and Contracts — accounts for about 16 of the 80 scored questions. Section 1.3 covered the anatomy of a policy (declarations, insuring agreement, conditions, exclusions, definitions). This section covers the provisions an adjuster actually uses on a file. The language below follows the ISO homeowners, commercial property and personal auto forms. Hawaii's standard fire policy and statutes add rules covered in 7.1 and Chapter 8.

Duties of the Insured After a Property Loss

The ISO homeowners form lists these duties. The insurer has no duty to pay if a failure to perform them prejudices the insurer:

1. Give prompt notice to the insurer or its agent.
2. Notify the police in case of loss by theft.
3. Notify the credit card or electronic fund transfer card company in case of loss under that additional coverage.
4. Protect the property from further damage, make reasonable and necessary repairs, and keep a record of repair expenses.
5. Cooperate with the investigation.
6. Prepare an inventory of damaged personal property showing quantity, description, actual cash value and amount of loss, with bills and receipts.
7. As often as reasonably required: show the damaged property, provide records and documents, and submit to examination under oath and sign it.
8. Send a signed, sworn proof of loss within 60 days after the insurer's request, setting out the time and cause of loss, the interests of all insureds and others, other insurance, changes in title or occupancy, specifications of damaged buildings, and receipts for additional living expenses.

The commercial property conditions impose similar duties. They include giving the insurer a description of how, when and where the loss occurred, and sending a sworn proof of loss within 60 days after the insurer's request.

The Insurer's Obligations: Our Option and Loss Payment

• Our option — the insurer may repair or replace any part of the damaged property with material of like kind and quality if it gives notice of its intention within 30 days after it receives the signed, sworn proof of loss.
• Loss payment — homeowners losses are payable 60 days after the insurer receives the proof of loss and (a) reaches agreement with the insured, (b) a final judgment is entered, or (c) an appraisal award is filed. Payment goes to the insured unless a mortgagee or another person is named or legally entitled to receive payment.
• Abandonment — the insurer need not accept abandoned property (1.4).
• Recovered property — if property is recovered after the insurer has paid for it, each side notifies the other. At the insured's option, the property is returned to the insured (and the loss payment is adjusted) or it becomes the insurer's property.

Hawaii adds statutory timing on top of the policy: a 15-working-day response rule for communications, a 30-calendar-day rule for offering payment once liability is affirmed and the amount is undisputed, and a 30-calendar-day written explanation for claims still unresolved (6.2).

Mortgagee Rights: The Standard Mortgage Clause

When a mortgagee is named in the declarations:

• Loss on the building is payable to the mortgagee and the insured as interests appear, usually by a jointly payable draft.
• If the insurer denies the insured's claim (for example, because the insured committed arson), the denial does not apply to a valid claim of the mortgagee, if the mortgagee:
  • notifies the insurer of any change in ownership, occupancy or substantial change in risk it knows of;
  • pays any premium due if the insured fails to do so; and
  • submits a signed, sworn proof of loss within 60 days after receiving notice from the insurer of the insured's failure to do so.
• The mortgagee must be notified at least 10 days before the policy is cancelled or nonrenewed.
• If the insurer pays the mortgagee but denies the insured, it is subrogated to the mortgagee's rights or may pay off the whole principal and take an assignment of the mortgage.

A loss payable clause gives similar but narrower protection to a lender or lessor on personal property, such as a financed boat or leased equipment.

Appraisal

Appraisal resolves disagreements about the amount of loss only, not coverage. Under the ISO homeowners condition:

1. Either party may make a written demand for appraisal.
2. Each party chooses a competent, impartial appraiser within 20 days after receiving the demand.
3. The two appraisers choose an umpire. If they cannot agree within 15 days, either party may ask a judge of a court of record in the state where the residence premises is located to select one.
4. The appraisers separately set the amount of loss. If they agree, that amount is the loss. If not, they submit their differences to the umpire. A decision agreed to by any two sets the amount of loss.
5. Each party pays its own appraiser and shares the umpire's and other appraisal expenses equally.

Arbitration

Arbitration decides disputes that appraisal cannot, typically liability and amount in uninsured or underinsured motorist claims. The ISO personal auto policy's Part C allows arbitration if both parties agree. Each party selects an arbitrator, and the two select a third (or a court does if they cannot agree within 30 days). A decision by two of the three is binding on entitlement and amount, but if the award exceeds the state's minimum financial responsibility limit, either party may demand a trial within 60 days. Hawaii's motor vehicle law has its own arbitration options for PIP and tort disputes (8.2).

Other Insurance

Assignment and Transfer of Rights

• Assignment of the policy is not valid without the insurer's written consent (the personal contract principle in 1.3). Many courts treat the post-loss assignment of a claim for a loss that has already occurred differently from assigning the policy itself.
• Subrogation — the insured's right of recovery transfers to the insurer to the extent of payment. Under the homeowners form, the insured may waive recovery rights in writing before a loss. If the insurer seeks an assignment of recovery rights, the insured must sign and deliver the related papers and cooperate. Commercial forms add that the insured must do nothing after a loss to impair those rights (1.2).

Cancellation and Nonrenewal (ISO Homeowners)

• The insured may cancel at any time by returning the policy or notifying the insurer in writing of the date cancellation is to take effect.
• The insurer may cancel by written notice delivered or mailed to the named insured:
  • for nonpayment of premium, at least 10 days before the date cancellation takes effect;
  • if the policy has been in effect less than 60 days and is not a renewal, for any reason on 10 days' notice;
  • if in effect 60 days or more (or a renewal), only for material misrepresentation or a substantial change in risk, on 30 days' notice;
  • for a policy written for more than one year, for any reason on 30 days' notice effective on an anniversary date.
• Nonrenewal requires written notice at least 30 days before expiration.
• Return premium is pro rata when the insurer cancels; it may be less than pro rata when the insured cancels.

State amendatory endorsements may lengthen these periods. Hawaii's motor vehicle cancellation rules are statutory (8.3).

Consent to Settle and the Insurer's Right to Settle

Liability forms such as the CGL and personal auto policy let the insurer settle any claim or suit as it considers appropriate. The insured's consent is not required, and the duty to defend ends when the limit is exhausted. Professional liability policies usually reverse this with a consent-to-settle clause and a hammer provision (3.8). Settling a liability claim within limits protects the insured from an excess verdict; refusing a reasonable offer can expose the insurer to bad faith liability (6.3).

Limitations: Suit Against the Insurer

The ISO homeowners form bars suit against the insurer unless the insured has fully complied with the policy terms and the action is started within two years after the date of loss. The commercial property conditions use two years after the date of the direct physical loss. The 1943 standard fire policy adopted in Hawaii uses 12 months after the inception of the loss (7.1). A form may give the insured more time than the standard fire policy, but not less with respect to the peril of fire.